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Two top-tier venture capital firms are looking to lead a private equity exodus out of Germany due to the country’s tax regime as Europe’s largest economy struggles to provide a conducive environment for investing in early-stage business.

Two top-tier venture capital firms are looking to lead a private equity exodus out of Germany due to the country’s tax regime as Europe’s largest economy struggles to provide a conducive environment for investing in early-stage business.

Venture capitalists Earlybird and TVM Capital are both planning to relocate their funds outside Germany for their next fundraisings because of the country’s uncertain tax regime, according to Hendrik Brandis, managing partner at Earlybird, and Bernd Seibel, chief financial officer at TVM.

The two executives said the most likely destination was Luxembourg, although Earlybird said it was also considering Guernsey and TVM said Scotland was an option.

Many of the largest buyout funds based in Germany are also considering moving out of the country for their next fundraising, according to a senior industry figure.

To reflect the changed locations, the firms will place some senior executives outside Germany and will also have the costs of running another office. Despite moving funds outside the country, however, the German venture firms would continue investing in their home markets, executives said.

Doerte Hoeppner, head of the German trade body the BVK, said the VC firms’ response came after uncertainty in German law had threatened the guarantee of tax transparency for funds in the country. This uncertainty has made investors in private equity outside Germany reluctant to invest in funds based in the country, according to Hoeppner. Another change in the law in 2008 had made the funds liable for value added tax on their fees, she added. The German finance ministry did not respond to a request for comment.

In a July 2008 ranking of countries’ overall legal and tax environments by the European Private Equity and Venture Capital Association, Germany came 22nd out of 27 countries.

Seibel said: “During the past 15 years we have raised all our funds in German structures … We would have loved to continue but we see serious problems with the law.”

Brandis said: “We are considering moving out with our next fund because the legal framework is so unfair.”

Dienst said: “Our decision in hindsight was correct, as the German government had said it would start a proper private equity law, [but this] is still in limbo.”